Fed watching and oil's relentless slide

March 18: The U.S. interest rate announcement is today, as oil slips south of $43 and protestors flock to the ECB


It’s finally Fed Day!

This afternoon, the Federal Open Market Committee will give its update on the U.S. benchmark interest rate, as well as its forecasts for the American economy, followed by a press conference with Fed chair Janet Yellen. While a change to the rate is not expected, the announcement will be watched and analyzed down to every wording choice, looking for signs of when a rate hike—the first since 2006—could come later this year and, when it does come, the frequency of subsequent hikes. In particular, look out for the word “patient,” or lack thereof. The key word choice, used in past statements, is taken as a sign that the Fed was waiting until the economy has strengthened further to consider raising rates.

The other sign to watch today is not a word, but a price: oil. The price of West Texas Intermediate has been around $42 all morning, and Brent, the global benchmark, has dipped under $52. The impact is being felt in Calgary, as energy companies, including Nexen and Talisman, have announced hundreds of corporate layoffs.

The sinking price is expected to be evident in Saskatchewan’s budget, to be released today. There will also be wholesale trade numbers for Canada for January, a weekly oil inventory report, and the tabling of the U.K.’s budget, coming less than two months before a general election.

If the Fed isn’t actually going to change the rate, why does today even matter? The current rate is 0-0.25 per cent, where it has been since the dog days of the financial crisis and, as we’ve seen in recent months, anticipation of any news, however small, from the Fed has an enormous impact. Almost any piece of U.S. economic data—which has largely indicated the American economy is strengthening—has convinced investors around the world that a rate hike could come sooner rather than later, pushing sell-offs even as indexes have also hit new records. Today isn’t just a chance to look into the crystal ball on when that hike will come, but to take stock of the widely divergent picture in the world economy right now, particularly between the eurozone and the U.S. As the U.S. economy weighs a rate hike, the eurozone has launched a 1.1-trillion-euro quantitative-easing program, a sort of last-ditch effort to get the economy going. The combined result is is the euro and the dollar have edged towards parity.

The ECB gets a new HQ—and thousands of protestors. The European Central Bank (ECB) officially unveiled its new, shiny, $1.4-billion Frankfurt headquarters this morning, but the lead-up wasn’t all photo ops and ribbon-cutting. It’s not clear how many protestors are at the ECB (Bloomberg said at least 10,000 were anticipated), but they clashed with police this morning, and the BBC is reporting that 350 people have been arrested so far, and several cars have been set on fire. The building drew the ire of the “Blockupy” movement over austerity measures and poverty, particularly in Greece.

The Canadian rate wars. The big banks are suddenly slashing their rates for spring, with five-year mortgage rates down as low as 2.79 per cent, which some say is the lowest ever posted rate by major banks. The rate cuts themselves are in keeping with spring tradition, but this year’s development is the new lows, even as the Bank of Canada, the government, the IMF and reams of economists have warned that the country’s housing market is overvalued. But the cuts aren’t necessarily even representative of how low rates actually are, or can go. Smaller lenders already offer lower rates, and discretionary mortgage rates can also go lower. Plus, the full extent of the Bank of Canada’s benchmark rate cut has not been passed on to borrowers.

In tech: Facebook’s payment system and out-of-control valuations. Facebook is just the latest of the major tech companies to launch a payment system—there’s also Apple Pay, found on the Apple Watch, and Google Wallet—that will allow friends to send money to each other. That’s the latest tech announcement—there’s one every day—coming amid a slew of hype, from Apple’s smart watch to Pinterest’s $15-billion valuation. All of which may lead you to wonder: Does a lot of hype and a billion-dollar valuation equal benefits for the real economy? Bloomberg has a great piece on the “fuzzy, insane” math behind multi-billion-dollar tech companies, which now include companies that provide disappearing pictures and online bulletin boards. So how do these former start-ups justify their massive valuations? Short answer: They don’t. The math is sketchy and the assumptions behind such numbers are even sketchier, and the companies risk having their true valuation come up far, far short once they decide to go public. The ubiquity of these inflated sums has even produced a new word: While tech companies with valuations at $10 billion or more are still called “unicorns,” that is, extraordinarily rare, there are now 10 such companies—hence “decacorns.”

Need to know:
TSX: 14,898.53 (+35.77), Tuesday
Loonie: 78.27 (+0.02), Tuesday
Oil (WTI): $42.24, Wednesday (7:30 a.m.)